Last week s market selloff illustrated how mixed earnings reports and stunted economic indicators are not going to be enough to keep investors some optimistic or even hopeful about the state of the recovery.

Enthusiasm over a merger deal by Intel for McAfee and a $38.6 billion hostile bid by BHP Billiton for Potash Corp. of Saskatchewan was blunted by an unexpected rise in new jobless claims.

After an early rally, the Dow Jones Industrial Average dropped sharply Thursday and finished the week down 0.9% at 10214. The S&P 500 was less volatile but edged down 0.7% to end the week at 1072. Friday marked the lowest close for both indexes since July 21.

As the dust settled, the market left economists and market wizards divided on the need for more government stimulus and the best way to handle a portfolio in a tepid market on a modest decline.

Jeffrey Kleintop, chief market strategist at LPL Financial, said disappointing economic data didn't signal a double-dip recession, but a slowed pace of an already uninspiring recovery.

"Much of the economic data of late has come in worse than the consensus economist expectations and worse than the prior month," he wrote Aug. 16. "Our view remains that economic growth will decelerate but remain positive, in the second half of 2010. This is likely to keep the stock market volatile and range-bound during the remainder of the third quarter."

Nouriel Roubini, an economics professor at New York University and head of RGE Monitor, argued in a Wednesday commentary that the government will once again need to step in. He said the Federal Reserve's Aug. 10 announcement that it would buy U.S. Treasuries with the principal payments on its mortgage-backed securities and agency debt was a sign there may be more policy intervention in the works.

"We've been seeing the Fed laying verbal groundwork for further monetary stimulus, which we consider warranted, and the latest announcement appears to be another signal of a forthcoming gradual policy shift," he said.

As the Obama administration tries to rein in the deficit, ISI Group policy analysts Tom Gallagher and Andy Laperriere wrote Friday that uncertainty over the expiration of Bush-era tax cuts remains "unclear, which affects many of the most productive small businesses." Since it's unlikely that will be settled before the pivotal mid-term elections, "investor concerns will mount going into October that a massive tax increase next year is a real possibility."

Some strategists say the push-and-pull dynamics of policy debate and major stock indexes shouldn't leave investors frozen. Rather, they should adjust to what is now called with varying degrees of sincerity "the new normal."

Jason Trennert, chief investment strategist at Strategas Research Partners, suggested as much in an Aug. 16 summary of how investors with more modest expectations should proceed.

"We re certainly not the first to highlight the likelihood that certain trajectories economic growth, equity returns, etc. recently viewed as trends, will be tough to return to," he said.

But an adjustment is possible, and could be profitable, based on taking action more frequently.

"Anchor the portfolio, on the one hand, with a block of global operators (strong multi-national brands with geographically diversified revenue streams), the types of names one would want to hold through periods of economic uncertainty, and, on the other hand, take decidedly shorter-term positions within and across the various asset classes," he wrote.

A buy-and-hold U.S. stock portfolio alone can't be expected to provide attractive returns over the coming years, the team of Jeff Spitzmiller, Jim Worden and Amar Chauhan at Iron Point Capital management wrote Tuesday.

"It is our belief that the asset allocation decisions across and within asset classes will be the drivers of return as distinct winners and losers will likely develop, unlike what we have seen in the recent past when the majority of the equity and bond markets moved up and down in tandem," they wrote.

They singled out emerging markets as a long-term investment opportunity, along with emerging market and high-yield U.S. bonds. Energy and financial services stocks and foreign developed markets were areas from which they urged a retreat.

Charles Lieberman, chief investment officer at Advisors Capital Management, also offered some consolation for uncertain investors during a difficult time.

"Given some time, equity investors will do quite well, in our judgment, at least those who have the fortitude to remain in equities," he wrote Aug. 16. "But it isn t easy now. And, in fact, it has never been easy. It has always seemed easy with hindsight."